Falling prices are providing an economic boost for the UK,Spain and Ireland

Today I wish to challenge a piece of economic orthodoxy which is that lower prices are bad for us. In essence the narrative goes like this. A rational consumer observing lower prices would delay his or her purchases until the relevant goods or services were cheaper and thus better value. However if we raise such behaviour from the individual or micro level to the macro or aggregate one the move to lower prices would involve a fall in aggregate demand in an economy as individuals delayed their purchases. This matters right now as more and more places are not only seeing lower inflation but actual price falls, for example today has already seen an annual inflation rate of -0.3% in the region of Saxony in Germany.

How did we get to such a conclusion?

This has been reinforced by the behaviour of central bankers who have pushed the theme that low inflation is good for us. Indeed as the excerpt below shows they have even perverted the meaning of basic words to do so. From the European Central Bank.

The ECB’s Governing Council has defined price stability as “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. Price stability is to be maintained over the medium term”.


They go further and tell us that a benefit of their “price stability” is this.

improving the transparency of the price mechanism. Under price stability people can recognise changes in relative prices (i.e. prices between different goods), without being confused by changes in the overall price level


Actually that would be easiest if inflation was 0% wouldn’t it?! In such a situation all price changes would be relative ones and they would be extremely transparent. Plainly price stability would involve 0% inflation and if that had been the plan all along then there would be less panic in the Euro area right now. Of course rather than that we have seen suggestions from parts of the IMF amongst others that the inflation rate target should be 4% in a rather transparent effort to apply some not very stealth like inflation to debt burdens.

What about electrical goods?

These has been a clash between theory and reality for some time here. After all if we were the rational consumers of the theoretical world none of us would have a television,laptop,tablet or smartphone. I would not be typing this now as I would be waiting for a cheaper opportunity to buy a PC. Yet we know the world is full of the latter particularly which could not have had more of a boom. Look at this from the results of Apple’s latest quarter.

The results were fueled by all-time record revenue from iPhone® and Mac® sales as well as record performance of the App Store℠. iPhone unit sales of 74.5 million also set a new record.


Actually we are in fact left wondering about the opposite effect where price falls especially when combined with technological innovation actually lead to a rise in demand.

Retail Sales make the case


This morning has seen this release from the Spanish statistics institute.

The annual rate of the General Retail Trade Index at constant prices stands at 6.5% in the series adjusted for seasonal and calendar effects and at 5.4% in the original series.


Quite a blast higher isn’t it but shouldn’t Spanish consumers be waiting for cheaper prices?

The Harmonised Index of Consumer Prices (HICP) annual change stands at –1.1%, showing a decrease of six tenths as compared to November.


Now whilst December may have been something of a freak or outlier we can say that as Spanish prices have begun to fall as they did in the latter part of 2014 then it has been accompanied by a rise in retail sales overall as opposed to the fall that economics 101 predicts.


If we travel across the Irish sea to the Emerald Isle we see something similar. Yesterday’s release from the Central Statistical Office again reported very strong retail sales.

The  volume of retail sales (i.e. excluding price effects) increased by 0.5% in December 2014 when compared with November 2014 and there was an increase of 5.1% in the annual figure.


This has been combined with disinflationary pressure and now outright falls in the prices that consumers pay.

Prices on average, as measured by the EU Harmonised Index of Consumer Prices (HICP), decreased by 0.3% compared with December 2013……The HICP decreased by 0.4% in the month.


Indeed if we look at the retail sales data we see that much of the recent improvement has been caused by falling prices. The annual increase in the value of retail sales was 2.8% in December compared to a volume increase of 5.1% with the difference being lower prices.

The UK

Earlier this month the evidence from the UK was both clear and stark.

In December 2014, the quantity bought in the retail industry (volume) increased by 4.3% compared with December 2013. The amount spent (value) increased by 1.9%. In December 2014, nonseasonally adjusted data show that the prices of goods sold in the retail industry (as measured by the implied price deflator) decreased by 2.2%.


Unlike UK consumer inflation which was still positive in annual terms (0.5%) in December prices in the retail sector have fallen. This has been accompanied by something of a surge in retail sales volumes.  Indeed as shown below the retail sales surge has been very powerful.

The underlying pattern in the data as suggested by the three-month on three-month movement in the quantity bought continued to show growth for the 22nd consecutive month increasing by 2.3% and was the strongest growth since April 2002 when it was 2.5%. This was the longest period of sustained growth since November 2007…..


Indeed the idea that inflation is somehow good for us is challenged again by this from the same report. Look what happened when we were in the situation of inflationary pressure which the Bank of England has lauded.

Between January 2008 and January 2013, the area shaded in grey, the volume of retail sales was broadly flat while the value of retail sales continued to grow, increasing by 12.1%.



There is a cautionary note to this and it is that in any economy we cannot undertake a test-tube style experiment as we observe many things happening in the same time frame. However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

Not every economy has seen a boom accompany falling prices as Greece again comes to mind. However a  sustained fall in the price level has been accompanied now by signs of a retail pick-up so are we seeing a positive effect there too? Of all places the mess that is the Greek situation makes the issue foggy and muddy but this is so far away from conventional and official thought it has a solid chance of being true. In musical terms my message to conventional economics comes from the first album I ever bought so cue Stevie Wonder.

They’ve been spending most their lives
Living in a pastime paradise
They’ve been spending most their lives
Living in a pastime paradise
They’ve been wasting most their lives
Glorifying days long gone behind
They’ve been wasting most their days
In remembrance of ignorance oldest praise
Tell me who of them will come to be
How many of them are you and me





44 thoughts on “Falling prices are providing an economic boost for the UK,Spain and Ireland

  1. Shaun, as I think you know, I agree with what you say here, and have said as much – although not perhaps as well – on a number of occasion. But there is an aspect of deflation that is a worry: it will depress investment – the future capacity of the economy. Investment at any current price level needs a return that covers not just the opportunity cost of the invested capital but also any change in the nominal value of the return on that investment. When prices changes are positive, that is not an issue, but if prices are falling the return on investment is eroded – will be lower – and hence less attractive.

        • Doesn’t need to.
          Profitability is the bottom line.
          Costs go down farther than price, profitability increases, investment justified, QED.

        • What’s the main cost at the point of sale? Rent and wages. Wages are having to cover the rent staff pay.

          Why are the establishment not trying to push down land costs to the absolute minimum to achieve greater efficiency by making the rentier extinct so all the rewards are passed onto producers and savings passed onto consumers?

          It’s the low hanging fruit yet they push prices the other way. They have zero interest in solving this problem. We mustn’t ruminate on the issue from the aspect that they want to change it. If we do all further reasoning becomes confused.

  2. Hi Shaun,

    Just as I was reading the last few paragraphs an image jumped into my head and started flashing on red alert. It was a mental picture of a worried looking middle-aged Japanese man with a shock of thick black hair… can you think who this gentleman might be? His name escapes me; I want to say his surname is Nomics San, but it’s not very Japanese is it.

    Best regards,


    • Hi Andy

      As to Abe-San well the subject is on my mind as we are in a phase where we get a lot of data from Japan. So far it has kind of reinforced my argument as the retail sales numbers were weak again and of course he and the Bank of Japan have pushed inflation higher there. But there is much more data to come in this sequence.

  3. The deflationary boom has hit restaurants in Manchester during January. 50% off in most places. So it the MSM were to be believed, the restaurants would be empty as everyone would be waiting for 75% in February.

    Luckily I don’t follow the MSM and managed (just about) to book a table for Saturday lunchtime.

    Only our indebted government fears deflation.

    • Hi Anteos

      I did the same with the tablet I sometimes use for this blog. I had seen it and thought it was pretty much what I wanted then a week later I noticed that some £30 was cut off the price. That sealed the deal for me whereas apparently I should have waited for more price cuts or something like that….

  4. You cannot delay a purchase of food or energy consumption. There is also a value in having something right away especially in the technology sector. People are not so worried about losing their jobs so they won’t be so worried about purchases and if they can delay them.

    Any one rational would never buy technology as it is always obsolete in several years. You are always better off waiting 6 months as you will get something more powerful for the same amount. This has never really deterred anyone from buying a new laptop though.

    • Hi Chris

      Higher German wage growth was one of the hopes of those looking to reduce one of the economic world’s imbalances otherwise known as the German balance of payments surplus. Perhaps the fall in prices (annual inflation in January was -0.3%) will give the German economy a boost as I outlined in the blog post.

  5. One of your best columns ever, Shaun. That waiting-for-fresh-price-drops argument for having some inflation really is a little dense. If you think about it, the only way to avoid that alleged constraint on growth would be to have such a high rate of inflation that even high tech goods would always be rising in price. Robert Mugabe tried that and it didn’t work well in Zimbabwe.

    All of the three countries that you mention are showing increases in housing prices according to Eurostat. Their annual housing price inflation rates for 2014Q3 were: Ireland, 15.0%, UK 11.7% and Spain 0.3%. If HICP inflation were calculated including an owner-occupied housing component based on net acquisitions, Ireland would almost certainly be showing inflation, not deflation and Spain’s deflation wouldn’t look so bad. And the UK inflation rate would be higher than it is.

    • Hi Andrew and thank you.

      To add to your list there is Russia and Ukraine which should be boom-time and Venezuela should be off the scale! I take your point about adding in asset prices to the consumer inflation measures. If you add it to mine about the real target being 0% then there would be no disinflation/deflation mania right now and no QE from the European Central Bank.

  6. hmm, sorry Shaun but it seems to me most main stream Economics is driven by ideology and not evidence , hence the rather absurd notion people will go hungry so they can eat better latter (!) or put off essential purchases

    Ofcourse I can see the mechanism for frivolous purchases being affected bu cheaper prices tomorrow but even this seems unsupportable given my wife’s recent shopping trips to the big name clothes stores –

    Wife: its a bargain – look what I saved ! ( big “bargain” labels all over the “mall tat” )
    Me: t but you could have saved more by waiting for the next sales ….
    Wife : but its cheap now and I had the money !

    Even with laptops ( which have a 4 model lifetime per year ) and other gadgets as others have posted – everyone knows that the next model will be out soon , companies can either keep quite to keep current model sales up , or use the fact that will be a new model to drum up interest

    Frankly I call the posit ( its not even a theory is it ? ) complete cotton wool .

    “The only function of economic forecasting is to make astrology look respectable.”

    John Kenneth Galbraith

    I have to admit I missed this one

    “If you feed enough oats to the horse, some will pass through to feed the sparrows (referring to “trickle down” economics).”

    good job I have this site to read for some sanity and truth 🙂


    “It is a far, far better thing to have a firm anchor in nonsense than to put out on the troubled seas of thought.”

    gets some popcorn and reads more quotes…..

  7. I really enjoy reading your blog Shaun. It is most informative.

    I was interested that you mentioned negative inflation in Saxony. It is a region of Germany where I recently studied property prices. On the whole they are extraordinarily low and the evidence suggests that they are falling in real terms. As we know in the UK low and falling house prices tend to create an atmosphere of consumer depression so it is interesting to see that a region of Germany may not be immune from this effect.

    If Germany wishes to stimulate the economy of its own moribund areas in the old Est Germany it needs to spend more – enough of lecturing everyone else on their failings, put your own house in order.

    • East Germany is a warning against currency unions. When they set the Ostmark at parity to the DMark, they made the entire region uncompetitive. So West German firms built their new factories in cheaper countries with Hungary (among others) attracting lots of FDI. East Germany still suffers higher unemployment and migration of it’s more skilled and motivated youngsters.

    • Hi Clearlydisenchanted and welcome to the comments section at least.

      Your reply touches on an area mentioned by Andrew Baldwin above. What would you say house price growth is in Saxony? Do they have falling asset as well as consumer prices?

      • Hi Shaun, I was looking at this a few months ago now and would have to go back to my notes to give a detailed answer but the essential point is that prices are static (in effect falling because of deterioration) or falling in real terms and there is a growing stock of older houses needing updating that struggle to find buyers and that investment buildings like apartment blocks are hard to fill with tenants. I think that the population is falling in Saxony as people migrate to areas with better employment prospects. I am going to brush up my German language skills to better understand some of the local authority information online for employment and age profile.

  8. Very interesting piece. Things I would throw into the mix:
    1. what’s the nature of the disinflation? Is it the statistical result of a one-off cut in prices (I’m thinking oil here) which will drop out of the figures after a year or is there a persistent downward pressure on prices? Is it just a fall in raw material prices working through or will profits and salaries start to be squeezed?
    2. it seems very natural there will be some increase in retail volumes as consumers respond to falling prices. But it still occurs to me that some areas of expenditure will be deferred and the longer prices go on falling the more areas this will encompass as expectations adjust.
    3. need to consider where we are in the economic cycle. Is the uptick in retail sales an outcome of a recovery, which may be masking the reaction to disinflation?
    4. postponing purchases only makes sense if incomes are expected to rise in the future. Otherwise consumers may as well live for the here and now and buy while something is affordable (especially with very low savings rates). I wonder if income expectations have changed or are changing.
    5. as drderrick says impact on investment decisions also vital.

    • Hi IanR and welcome to my corner of the blogosphere

      If I consider your first point then the retail sales figures suggest that 1/3rd of the downwards pressure on retail prices has been from petrol and diesel at the pump. So some is clearly one-off but there are other influences too. We do not know yet how much other prices will be pushed lower by this.

      3 is always a battle in any effort at econometrics I am afraid and is particularly true post credit crunch.

      4 is what I call a “dark side” point and is well made,it will need watching.

  9. There are those who must have the new technology as soon as it becomes available, no matter what, and there are those who are content to wait until it comes down in price and they can sensibly afford it.
    The first group will not change; for the second group, disinflation is more likely to hasten affordability.

    The majority of people go on holiday when the cost is at its highest.
    Who wants Prelles in July or Kerkyra in Feb?

    These are facts, not pseudo-science.

    • Hi therrawbuzzin

      Economics deals badly with any type of inverse demand curve like some holidays due to timing or the examples from women’s cosmetics. I was given something of a lecture on lip gloss economics by some female economists on Tuesday evening. It is a US $76 billion market.

  10. Shaun – one item *is* deferred when prices are falling. It’s the item the establishment use to print money which enslaves us.

    Yes folks, once again the man behind the curtain is at it.

    When land prices fall people defer purchases. This is what keeps Carney awake at night as it drives the whole system.

    That’s why non of the rhetoric on consumer goods makes any sense. They want to say land prices but that would let the cat out the bag.

    • The UK makes it’s manufacturing uncompetitive with sky high rentals and planning restrictions on self build. It is called tradition and history – the royal family and church are at the top of the rent seeking food chain …. and it took the USA several years of war to free themselves from the royal charter.

      • Agreed, which is why it’s incredible now that the US pushes private property as a religion. It’s just a matter of time until an establishment emerges and lords it over the rest.

        Land value tax and inheritance tax are just what the big boys don’t want. That alone is enough to recommend we do them.

        • LOL. The problem is that the big boys in the USA pay 10%-15% whilst the middle class pay 40%+. The USA needs to end agricultural subsidies and tell all the John Deere driving scroungers they ain’t getting any more handouts …

          I’d suggest that your establishment has already arrived – call it the Harvard set, any bets on a third Bush running for president ?

        • Can’t reply on this silly threading to your reply so adding to mine. Agreed the USA having dynastic politics is a clear sign. They should death tax the lot of ’em (to death).

  11. Hi Shaun, I never understood the inflation good disinflation bad argument when I was at college although it occurred to me at the time that if I were a businessman or politician I would like inflation as it provides the businessman with confidence he can achieve higher prices (even if his individual business costs are stagnating) thereby increasing his profit and encouraging him to invest (as argued by dr derrick above), whilst the pollie loves inflation to make his debts cheaper.

    As drderrick says if disinflation stays too long businesses will be discouraged from investing as they are uncertain they can recover the fixed costs of plant and machinery purchased now over the life of the machinery in the future when facing falling prices.

    A counter argument to this would be that they have to re-invest to increase productivity and drive down costs to restore profitability.

    Have you ever thought about the old chestnut that consumers take credit because they can afford to buy things now that they they don’t currently have the money for and never will have because the price will carry on increasing?

    This type of consumer may decide to wait and save for something when they expect it’s price to fall in the future except we are in a “now” society and most want things now to enjoy them now and are happy to pay the extra interest on a loan as the price of enjoying the good/service sooner rather than later because as Keynes said “in the long run we are dead” and are disinterested in deferred purchases.

    So I think falling prices are great for me as a consumer but if they stick around for quite a while the I will become cautious about re-investment in my business. I haven’t had to reduce prices yet but that’s more because I’m in a niche market with relatively hiogh barriers to entry in my area so the point I’m trying to make is every business faces it’s own specific circumstances and in a “now” society falling prices will encourage consumers to buy more whilst businesses will become wary of further investment (unless they think of trying to restore profitability via increased productivity from the investment but I don’t think many businesses are that progressive). Ultimately though, if wages start matching prices then falling prices = falling wages = falling money supply = falling VALUE GDP, although not volume/quality – consider your living standards and business performance can improve although the monetary value of everything falls and there it is, the final outcome that no -one understands..

    • ….and that final statement is based on the assumption that all other economies behave identically so no competitive advantage is obtained via exports. If an advantage was obtained then of course the more efficient economy could end up with falling prices/wages accompanied by rising monetary value GDP as well as in volume/quality.

    • There are 2 sides to falling prices. Consumers also benefit from businesses facing competitive pressures and responding to them with innovation. Competitive pressure reduces complacency and often increases the intensity of innovation. Sometimes innovation becomes fantastic invention, raising productivity and living standards. It is all part of the economic cycle of boom and bust ….

  12. Great post Shaun.

    I compare countries/cities/jobs by purchasing power parity, it’s a much better benchmark than GDP. Higher salaries in London mean little when it all goes to pay for housing.

    Walking around Cardiff, I’ve seen lots of expensive boats in the marina – more than I ever saw when I worked in London. I know it’s not a scientific methodology, but it appears to support the assumption that cheaper housing makes the 99% richer.

      • my net earnings, and my purchases. So it’s very individual based on how I want to live. Other people would reach different geographical conclusions based on different circumstances. Cheap housing means more money for everything else.

        I’ve recently gone back into software, in London I might get double the average UK wage. In Sofia it’s 5 times the average Bulgarian wage. I can go skiing / hiking / mountain biking nearby cheaply any weekend. Eating out is cheap. I don’t care/need a new car every 3 years – if my old one isn’t broke don’t replace it – if it is 2nd hand will do. Bulgarian housing is very affordable for me, and I’d have zero chance of affording private schooling for my children in Britain.

        PS – Cardiff is a business trip courtesy of job based in Sofia. Am missing much of the ski season 😦

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